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The Gold Report: Rohit, in a recent
interview you said gold is "not a guaranteed safe haven." In your
view, what are effective ways to preserve capital?

RohitSavant: If you're talking
about preserving capital, it depends a great extent on your
timeframe and your risk appetite.

"When the fiscal cliff debate intensifies as we get closer to
the deadline, we may see the gold price rise in response."

If you're looking at the short term and want no fluctuations in
your principal, the best way to preserve it would be either
certificates of deposit or T-bills and hope that inflation
doesn't rise significantly.

But if you are looking at the longer term and are willing to take
some ups and downs in your capital, a better way of preserving or
increasing your capital would be investments in equities, real
estate and gold. You could reduce the risk a bit by purchasing
dividend-paying equities.

TGR: Do you believe gold is an effective way to
preserve capital?

RS: Over the long term, it is. In the short
term, you are going to see fluctuations in prices.

TGR: What range do you expect gold to trade in
through the first half of 2013?

RS: We expect it to stay more or less in the
same range that it did this year, probably between
$1,550-1,800/ounce (oz) for the first half of 2013.

TGR: Are you seeing a similar path for silver?

RS: In the case of silver, we have a more
bearish view. One reason is that silver prices are going to be
negatively affected by increases in supply. Today silver prices
are significantly higher than the average cash cost for producing
silver. So we expect that a lot of fresh supply will come
onstream.

Another reason is expected lower investor interest. Silver tends
to be more volatile than gold, so you might see sharper declines
in prices with lower investment demand.

TGR: Does that mean you prefer gold to silver
right now?

RS: At this point, we definitely see gold as a
better investment than silver. We don't expect any significant
increases in gold prices, but we don't think that gold prices
will decline substantially from where they've been this year.

TGR: Is there a possibility that 2013 will be
the first year in the last 12 when the gold price finishes the
year lower than when it started?

RS: Yes, it will likely be the first year to end
in a lower price in over a decade.

TGR: If you met a goldbug who is unabashedly
bullish on the gold price and he challenged your price position
on gold, how would you respond to that person?

RS: We face this situation quite often because
our view on gold has not been as bullish as a lot of other market
participants. Our response to them is that we think a lot of the
factors that are being cited as reasons for gold prices going up
are already factored into the price of gold.

"Central banks have been doing pretty much what we expect
private investors to do, which is wait for gold prices to soften
before they step in as buyers."

For instance, there are a lot of problems with the global
economy. We're not denying that. We are just saying that these
are problems that have been known now for several years and have
already been factored into the price of gold. So gold prices
won't skyrocket. But on the other hand, the global problems are a
reason we think that gold prices will not decline sharply either.

TGR: In early December, we saw commodities
including gold and silver sold off in response to concerns
regarding America's "fiscal cliff." In your view, what are the
three biggest downside risks to gold right now?

RS: The biggest risk to gold would be that
investors lose interest. But we don't think that investors will
lose interest, central banks will stop buying gold, or there will
be a sudden increase in the supply of gold. These could all be
potential downside risks. That said, we do not expect that any of
these risks will materialize in 2013 or the near future.

The biggest risk for us is not so much that prices would go down,
but that they won't rise substantially. We don't see a sharp
decline in gold prices going forward. We don't see gold going up
much. We see a sideways to potentially slightly lower range, but
nothing significant.

TGR: What about the fiscal cliff itself? Is that
a concern for the gold price?

RS: When the fiscal cliff debate intensifies as
we get closer to the deadline, we may see the gold price rise in
response. So the fiscal cliff could be positive for gold prices
during December. I think the slight softness that we're seeing in
gold prices recently is really the marketinvestors holding off
to see if prices could decline further. Gold could potentially go
down to around $1,680/oz and get some support at that level. Then
you might see some investors coming back, buying gold in response
to the fiscal cliff issue. Once in 2013, whatever the outcome of
the fiscal cliff, it would result in softening of economic
growth, which would weigh on gold prices during the first half of
next year.

TGR: The World Gold Council (WGC) reports that
the Indian market is showing signs of recovery in gold demand, up
9% to 223.1 tons from 204.8 tons in the third quarter of 2011.
The WGC press release reads, "Indians appear to have acclimatized
to recent price trends and have been buying into a rising
market." What's behind that change in sentiment and do you
believe it's likely to continue in 2013?

RS: The buying of gold for Indians is very
deeply engrained in the culture. When a festival is coming up, or
if it is marriage season, Indians are going to buy gold. It's
highly unlikely that they would refrain from buying gold because
of higher gold prices.

TGR: But they have cut back purchases in the
past.

RS: The increase in demand in the third quarter,
in a rising price environment, may have occurred because of
pent-up demand. Demand from the first half of the year had been
cut back by various factors.

Indians may buy a smaller amount of gold per person if the price
goes up. But they're not likely to stop buying gold just because
the price has increased. The demand is going to be there.

TGR: China is another culture where gold is much
more prevalent in the lives of people than it is in the West.
The Wall Street Journal reported this week that China,
for the first time ever, will allow interbank gold trading with
Shanghai as a major gold trading center. Do you expect that to
have any impact on investment demand?

RS: That is something that would increase
investment demand, in that China is trying to open up its
markets. It's all part of China liberalizing its financial
markets.

TGR: Another report says Deutsche Bank is
predicting gold will rise above $2,200/oz in 2013. Part of the
reason is that it believes China eventually wants the yuan to
challenge the U.S. dollar as the world's reserve currency.

To do that the Chinese Central Bank is going to need to buy more
gold in a big way. Right now it's currently ranked sixth in total
gold reserves, at least the reported gold reserves. Does that
strike you as a credible thesis or is that something that you
believe is still a long way off?

RS: I'm not sure that China would want its
currency to be used as a reserve currency because that would
inherently push up the value, which would in turn hurt the
country's exports. I don't believe it's going to happen over the
next several years. It will take a number of years for any
currency to challenge the U.S. dollar.

"The PGMs definitely have some promising fundamentals."

I believe the gold that China holds right now is about 1.8% or 2%
of the total reserves. As for buying gold, the Chinese Central
Bank does not release that information quickly. The last time it
bought gold, nothing was said about it until a few years later.
It could be buying gold right now and we won't know about it
until China discloses that information.

I think that central bank buying is price supportive, but I don't
believe that it's something that would push gold prices sharply
higher. Central banks have been doing pretty much what we expect
private investors to do, which is wait for gold prices to soften
before they step in as buyers.

We saw that this year in March when gold prices came down.
Central banks added on a net basis 2.3 million ounces (Moz) of
gold to their holdings. Central banks followed the same logic
again in July, when gold prices were moving sideways at the lower
end of the range for 2012, adding 2.95 Moz of gold to their
holdings on a net basis. This was the largest net purchase of
gold by central banks for 2012.

Bottom line, central banks are not buying gold when prices are
going up. Therefore, the impact of central bank gold buying is
more likely to be price supportive than price positive.

TGR: At investment conferences across North
America, senior gold producers are routinely making presentations
about why their companies are better investments than gold
exchange-traded funds (ETFs). Much of their arguments are based
on the idea that gold ETFs own far less gold than they claim.
What's your view?

RS: The gold that ETFs own is publicly disclosed
and transparent, so I'm not sure how companies can make that
claim. As far as talking up investing in their companies, that's
their jobthey're supposed to get investors interested in owning
their stocks.

RS: We haven't done any specific analysis. But
gold ETFs basically track the gold price, so it's really a
question of whether you are invested in physical gold or whether
you want to invest in equities.

Equities do have the advantage of performing better for the most
part over the long term. But in recent months, we've actually
seen gold equities get slammed for various reasons. One of the
biggest reasons is that their costs are getting out of hand.

TGR: If the gold price remains range bound near
current levels, does that make gold producers more appealing?

RS: Only if gold producers are able to control
their costs. If producers can prove to the markets that they can
control costs, then equities would be a good investment compared
to gold. Also, if gold prices remain range bound, and that
prompts miners to shift their focus to higher-grade gold, that
could potentially reduce costs and again make them more
attractive as an investment. So it depends on how the mining
companies deal with it. If they let their costs escalate and the
price of gold stays sideways, their margins will get squeezed, so
that will make them a bad investment.

TGR: Is there is a particular jurisdiction or
jurisdictions that CPM Group sees as being more appealing for
gold production?

RS: For gold production, there is a jurisdiction
that is not appealing. South Africa is not very appealing at this
point. The atmosphere surrounding the mining industry in South
Africa at the moment is pretty complicated.

A lot of factors are at play. The country has deep-level mining,
which makes it difficult for miners to control costs. You also
have additional problems related to labor and infrastructure and
government policies. All of those things collectively make South
Africa a fairly difficult environment to mine in.

TGR: Is your near-term forecast for other
precious metals like platinum, palladium and rhodium more
encouraging than it is for gold and certainly for silver?

RS: The PGMs definitely have some promising
fundamentals. The supply side is constrained because a lot of
supply comes from South Africa. Those mines are facing the same
problems as the gold mining industry in that country. So the
potential is there for supply to possibly decline.

Then you have the fabrication demand side where there is little
substitution for PGMs. For example, in the case of auto
catalysts, any other combination of metals used would not reduce
emissions at the same level of efficiency as the PGMs do. So you
have expectations of heavy fabrication demand and the potential
for constraint supplies that are both supportive and positive for
the PGMs.

TGR: What advice can you give to precious metals
investors in general that they can put to good use in 2013?

RS: It's about doing your homework. When you're
looking at equities, you need to look at a number of factors
besides metal prices. For example, investors need to look at the
management, specific country risk, and within country risk you
have government policies, infrastructure. There's also the mining
grades of the deposits and the costs to get the metal out of the
ground. Costs are especially important to pay attention to in the
current environment where mining cash costs almost across the
board are rising pretty substantially.

TGR: Are you predicting cash costs among gold
miners are going to rise in 2013?

RS: We do think gold mining cash costs will
continue to rise. One of the problems is the rising gold price
itself. That has been encouraging miners to mine lower-grade ore,
which in turn pushes cash costs up. Another problem is mining
regions, such as South Africa, where all these other additional
factors are pushing cash costs up. So, yes, we do think the costs
for gold mining will continue to rise in 2013.

We have data going through the second quarter of this year. What
we saw is a peak in the profit margins in mid-2011 when gold
prices were high. What we saw in the second half of 2011 and the
first half of 2012 is the slight decline in gold prices and a
continued increase in the costs. So companies' profit margins got
squeezed. We think this will continue if mining companies don't
curb their cost increases. This is the biggest problem or threat
to the gold mining industry.

TGR: What are the biggest inputs into those
rising costs for miners?

RS: The biggest input cost is labor, which
represents about 50% of total cash costs for gold mining. We keep
hearing of strikes and shut downs and those kind of problems.
That is not good for the largest component of costs, labor. Fuel,
for instance, only accounts for about 8% to 9% of costs. And
about the same amount for utility costs, such as electricity and
water.

TGR: Were fuel costs 8% or 9% five years ago or
were they a smaller percentage? It's a number in a vacuum
otherwise.

RS: Fuel costs were a little bit less than 8% or
9% five years ago. Fuel costs haven't been the biggest issue for
cash costs. It's labor costs. The inflation in labor costs is
what's pushing up the whole cash cost curve.

TGR: Are there any parting thoughts you have for
our readers?

RS: A lot of times our gold outlook comes out
sounding bearish when it's not. I just want to say that we do
think gold prices will stay high. We just don't think that
they're going to skyrocket.

TGR: Where was CPM Group in its forecast for
2012?

RS: We had an annual average of $1,620/oz at the
beginning of the year. The average price for gold so far in 2012
is about $1,670/oz. So we were lower than the average. We did do
well compared to 8590% of the other analysts whose price
forecasts are way, way higher.

TGR: Thanks for your insights.

Rohit Savant is a senior
commodity analyst at CPM Group and joined CPM Group in 2005.
Savant is the lead analyst for CPM Group's Precious Metals
Long-Term Market Outlooks, Precious Metals Yearbooks and
Precious Metals Advisory. These publications include in-depth
analysis on gold, silver, platinum, palladium and rhodium
markets. Savant provides consulting services for all of the
precious metals on an ongoing basis to various hedge funds,
individual traders, producers and end users.

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